How to Accurately Calculate the Fiscal Impact of School Voucher Programs

BY Martin Lueken

Published Sep 27, 2016

Some may not admit it, but many of us cringe when a conversation turns to numbers and math. Well, we’re taking it there with this post. Feel free to take a moment to cringe, but we urge you not to turn away.

The continued growth in popularity and expansion of school voucher programs makes it vital for parents, taxpayers and policymakers to understand their affect on the bottom line. More than 32,000 students in Indiana alone receive vouchers to attend private schools of their choice.

Calculating the fiscal impact of these programs would seem straightforward on the surface, but critics and supporters of educational choice strongly disagree about such programs’ fiscal effects on taxpayers, state budgets and schools. Actually, the computations are quite complex. State departments of education even get the calculations wrong. So it’s not surprising, then, that this issue is debated and misunderstood by many.

This is why knowing how to estimate a program’s fiscal impact is so important. It can help readers form their own opinions and leave the rhetoric behind.

This article provides a step-by-step walkthrough of how to estimate the fiscal impact of a school voucher program by recommending a road map first for how to compute the costs and savings of voucher programs in general. Then, we use Indiana’s school voucher program, the largest such program currently operating in the U.S., as a case study.

Based on my calculations, the Indiana school voucher program generated $27.8 million in net savings in 2015–16, or about $850 per student who used a voucher.

Follow along to see how I got there.

Costs from Voucher Programs

Vouchers are usually funded with state dollars. Thus, when a student chooses to participate in a program (regardless where the student was enrolled before), state taxpayers incur a cost.

When a student choosing to use a voucher switches from a public school, the public school district also sees its revenue decline by a certain amount, usually by the state’s share of funding the child’s education. However, it is a critical point that school districts will keep some or most of the federal funds and local funds because they are not tied (or loosely tied) to student enrollment. That is, while state funding for public schools depends on enrollment, federal and local funds that flow to school districts usually do not vary with enrollment fluctuations (at least in the short run).

In a nutshell, total revenues may decrease for a school district, but a district’s per-student funding will actually go up. Thus, while revenue that flows to school districts will decrease because of vouchers, it does not decline by the full amount allotted to educate a child who chooses to leave. Public school districts typically keep some funds for students they no longer educate.

Let’s think about this for a bit…

Public K–12 education is the only enterprise in our society where service providers keep a portion of people’s money—people who have determined they do not want to be customers. Some might say that education is different or special, and they would be right. But this arrangement is not seen even in higher education, where a college or university does not receive any more money after a student transfers; it cannot keep any tuition, Pell grants, or state appropriations for any students that leave.

This is an important point that critics strategically omit from their arguments. Failing to properly account for such savings in a fiscal impact analysis masks the true economic impact that educational choice programs may have on taxpayers.

Savings from Voucher Programs

Education funds to public schools flow through the federal government, state government and local school districts. Federal funds comprise only about 10 percent of the education pie. For the most part, . Therefore, almost all of the fiscal action will happen at the state and district levels.

Savings for the State

When a student uses a voucher to leave a public school, the student is usually no longer counted in the state’s school funding formula. Therefore, the state’s funding obligation is reduced by the amount that would have been allocated to the school district had the student continued attending her public school.

State governments have a choice about what to do with its savings. They can:

Hold the funds rather than spend them (state governments could subsequently lower taxes or save the funds for future use)
Allocate the savings to public schools
Allocate the savings to other public services (e.g. healthcare, housing assistance, etc.)

Savings from the first item is obvious. For the second and third items listed above, states also incur savings—it’s just that decisions have been made (actively or passively) to reallocate those savings in some way. Just because a state chooses not to hold the funds doesn’t mean state taxpayers do not incur savings. By not holding the funds, the state implicitly makes decisions to spend them.

Savings to Public School Districts

When a student uses a voucher to leave a public school, the public school district’s revenue declines. By the same token, economic principles (and common sense) tell us that there is also savings because the school no longer has an obligation to educate this child. Therefore, a school district can commensurately reduce its costs by the short-run variable cost amount.

Variable costs fluctuate when student enrollment changes. They are distinct from fixed costs, which are costs that schools will incur regardless of enrollment levels (things like keeping the lights on, leasing a building, or paying off debt service).

Fiscal principle: As long as average variable cost is greater than the average voucher amount, a voucher program’s fiscal impact will be positive.

It’s notable that critics often claim that schools have high fixed costs. If true, then it’s also the case that schools with high fixed costs require less revenue when their enrollment increases. But that is not the case. This draws attention to an important concept: School funding is not a one-way ratchet wrench. It works in two directions because both revenue and costs vary with enrollment.

When enrollment declines, revenue also declines. But schools incur lower costs as well because they are responsible for educating fewer students.
When enrollment increases, revenue also increases to cover the increased costs associated with educating more students.

Now that we discussed what the picture looks like, we need to examine the pieces before we put together our fiscal puzzle.

Fitting the Puzzle Pieces Together

The fiscal impact of a school voucher program is completely defined by the following relationship:

Net fiscal impact = Total variable spending associated with students who switch from a public school to the voucher program – Cost to fund vouchers

The fiscal impact of a voucher program is determined by putting four important pieces of the puzzle together:

The number of students enrolled in the voucher program (E)
The average cost of school vouchers (V)
The percent of voucher students who switch from public schools (s)
The average variable cost for educating a student in public schools (C)

The mathematical equation for the net fiscal impact is:

Net fiscal impact = (s*E*C) – (V*E)

The savings for taxpayers is given by the first term and will be determined by the number of students in the program, how many switched from public schools and the average variable cost. The total cost to taxpayers is given by the second term and is determined by the number of voucher students and the average value of vouchers.

The share of public-to-private switchers in a school choice program is often a point of contention (as in Indiana whenever the state department of education releases its school choice report). From the equation above, it is straightforward to estimate the number of students that would need to be public-to-private switchers for the program to be fiscally neutral (net fiscal impact equals zero). This “break-even rate” (s’) is simply:

s’ = V / C

Knowing a voucher program’s “break-even rate” is important because there must be at least that percentage of public-to-private switchers using the program for it to be fiscally neutral. Again, to get a program’s “break-even rate,” just divide the average cost of the voucher by the average per-student variable cost.

For example, if the average cost of a voucher is $5,000 and the average student variable cost is $7,000, then at least 71 percent of voucher users will need to come from public schools for the program to not cost taxpayers anything. If more than 71 percent of voucher-using students switch from public to private, then taxpayers save money.

Now, let’s apply actual data from Indiana to this framework and show how to estimate the fiscal impact of its voucher program as well as the program’s “break-even rate.”

Using the Formula to Calculate the Fiscal Impact of Indiana’s School Voucher Program

First, Indiana’s “break-even rate” of public-to-private switchers in the voucher program is 65.1 percent.

So let’s see how the program is doing. Is it costing or saving money?

Assembling the Data

Sometimes data are not available (this is usually the case with data on switchers), so we offer suggestions for how to reasonably obtain estimates. The Indiana Department of Education’s (IDOE) report Choice Scholarship Program Annual Report: Participation and Payment Data is located here.

Number of voucher students: For SY 2015–16, a total of 32,686 students participated in the voucher program (Table 2 of the IDOE report).

Cost of the voucher: For SY 2015–16, the total eligible award amount was $134,744,300 (Table 25 of the IDOE report). Dividing by 32,686 total choice students, we estimated that the average voucher award was $4,122.

Number of switchers: The best estimate of public-to-private school switchers in Indiana is 25,684 students; that’s 78.6 percent of those participating in the voucher program.

The IDOE inaccurately reported that 52.4 percent of voucher students in 2015–16 had “no record of attending an Indiana public school” (Table 12b). Though some individuals interpret this as the full cost of the program to taxpayers, to suggest this is misleading. Among other things, the IDOE wrongly assumes that none of the incoming kindergarteners in the voucher program would have been public school students had the voucher program not been an option.

Fortunately, in a previous post, Jeff Spalding meticulously demonstrated step by step a very reasonable and cautious way to estimate the number of non-switchers using the IDOE data. At that time, a previous report by the IDOE cited that 39.3 percent of voucher students were in the “no record” category.

Spalding estimated that the actual rate was just 19 percent. Without going through all the gory details (the ambitious reader can refer to Spalding’s post), I estimated that the share of voucher students who are non-switchers increased slightly since 2014 to 21.4 percent (or 7,002 students).

Thus, 78.6 percent of voucher students (or 25,684 students) would likely enroll back in public schools if the voucher program was eliminated.

Average variable cost of public school students: To estimate the per-student average variable cost, we rely on the most recent data available from the Indiana Office of Management & Budget (OMB). According to the OMB’s statewide summary report on educational expenditures, $5.6 billion was spent on “Student Academic Achievement” (aka instruction) and $938 million was spent on “Student Instructional Support.” These reflect costs that fluctuate with student enrollment. Adding these together also implies that 57.4 percent of Indiana’s $11.5 billion dollar public education budget are counted as variable, meaning that about 43 percent are fixed in the short run. (Notably, this estimate for variable costs is considerably lower than the roughly two-thirds that economists and other researchers have conservatively estimated.) Dividing by Indiana’s total public school enrollment of 1,046,527 students, average variable costs equal $6,329 per student.

We already know Indiana’s school voucher program will at least save money. The program’s “break-even rate” is 65.1 percent, and the percentage of public-to-private switchers is well above that at 78.6 percent. Now let’s put all the pieces together to determine how much the program has saved.

This table summarizes our main ingredients and estimates the fiscal impact of Indiana’s voucher program for the 2015–16 school year:

Fiscal Impact of Indiana Voucher Program

Fiscal Impact of Indiana Voucher Program 2015–16
Key Data:
Number of voucher students (E)	32,686
Cost of voucher (average) (V)	$4,122
Public-to-Private Switcher Rate (s)	0.786
Average variable cost per student (C)	$6,329
Fiscal Impact:
Program savings (sEC)	$162,599,579
Program cost (V*E)	$134,731,692
*Net savings (sEC)–(VE)**	$27,867,887
Net savings per voucher student	$853

As the IDOE reported, the program cost taxpayers $135 million this past school year. Taxpayers and public schools also saved, however, about $163 million from short-run variable cost savings now that they no longer had the responsibility of teaching those students. Thus, the net impact was $27.8 million in savings to Indiana taxpayers and public schools.

If you have any questions or comments about calculating the fiscal impact of school voucher programs, don’t hesitate to comment below or contact me at marty@edchoice.org.